Internal Revenue Service Requires New Disclosure Form for Specified Foreign Financial Assets in the New Year
In 2010, the Foreign Account Tax Compliance Act (FATCA) created a new statute, Internal Revenue Code Section 6038D (Section 6038D) that requires specified persons with an interest in specified foreign financial assets that exceed $50,000 in value to file a statement with their income tax return which discloses identifying information regarding their foreign assets. Failure to report these specified foreign financial assets could result in severe penalties. For a more detailed description of FATCA please see our Alert of April 2010.
The statute is effective for tax years beginning after March 18, 2010, which for most taxpayers will mean the filing of taxpayers’ 2011 U.S. income tax returns. On December 15, 2011, the Internal Revenue Service (IRS) released guidance in the form of Temporary Regulations under Section 6038D to assist “specified individuals” with their reporting requirements under the statute. The guidance clarifies certain key definitions and increases the asset threshold reporting requirement for certain individuals. On the same date, the IRS issued Proposed Regulations that address the application of Section 6038D to domestic entities. However, the Proposed Regulations are not currently in effect and, as proposed regulations, are not binding.
The Temporary Regulations under Section 6038D provide that certain “specified persons” who have an interest in one or more “specified foreign financial assets” with an aggregate value that exceeds certain thresholds to file a Form 8938, Statement of Specified Foreign Financial Assets. (The Form 8938 and the instructions were issued on December 21, 2011.) The Form 8938 requires identifying information about the account or asset, such as, (1) the type of account; (2) the value of the asset/account; (3) information about when the asset/account was obtained or opened; and (4) the tax items attributable to the asset/account. The filing of the Form 8938 does not relieve U.S. taxpayers from the requirement to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR).
Who is a Specified Person Required to File a Form 8938?
The Temporary Regulations provide that a U.S. citizen, a resident alien of the U.S. for any part of the tax year, or a non-resident alien who has elected to be treated as a resident alien is a “specified person.” An individual is not required to file a Form 8938 if he/she is not required to file an annual income tax return in the tax year. The Proposed Regulations for filing Form 8938 are applicable to domestic entities and only apply if the entities are formed or availed of to hold foreign financial assets and the value of the assets exceeds certain threshold requirements. The Proposed Regulations apply to taxable years beginning after December 31, 2011.
What is a Specified Foreign Financial Asset?
Specified Foreign Financial Assets include financial accounts maintained by a foreign financial institution and foreign financial assets which are held for investment and can be described as: (1) stock or securities issued by someone that is not a U.S. person; (2) any interest in a foreign entity; and (3) any financial instrument or contract that has an issuer or counterparty who is not a U.S. person. The Temporary Regulations provide a list of certain foreign assets which are excluded from reporting. For example, an asset that is used or held for use in the specified person’s trade or business, an interest in social security or a similar program of a foreign government, assets that are reported on certain other tax forms, or a beneficial interest in a foreign trust or a foreign estate where the specified person does not know or has no reason to know of the interest, are not specified foreign financial assets which require a Form 8938.
What Does it Mean to Have an Interest in a Foreign Financial Asset?
A specified person is considered to have an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions attributable to holding or disposing of the asset are or would be required to be reported (or otherwise reflected on) the individual’s tax return. Further, an individual who is the owner of a disregarded entity or foreign grantor trust is deemed to have an interest in any specified foreign financial assets owned by the disregarded entity or trust. Under the Temporary Regulations, an individual who jointly owns a specified foreign financial asset is deemed to have an interest in the entire asset, and, thus, will have a reporting requirement under the new regulations.
What are the Reporting Thresholds?
As discussed above, the Form 8938 must be filed when the total value of specified foreign assets exceeds certain thresholds. The required thresholds differ depending on the individual’s filing status and where he/she resides. The thresholds are higher for taxpayers living abroad because the Temporary Regulations note that an individual residing outside the U.S. can reasonably be expected to have a greater amount of foreign financial assets than taxpayers residing in the United States.
- For unmarried taxpayers residing in the U.S. and married taxpayers living in the U.S. who file separate returns, the reporting threshold is met if the total value of the specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year;
- For married taxpayers who live in the U.S. and who file joint returns, the reporting threshold is met if the total value of the specified foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year;
- For taxpayers living abroad and who do not file a joint return, the reporting threshold is met if the total value of the specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year;
- For taxpayers living abroad and who file a joint return, the reporting threshold is met if the total value of the specified foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.
It is important for taxpayers to determine whether they are subject to this new reporting requirement because there are significant penalties for failing to comply. The failure to file the Form 8938 could subject a taxpayer to criminal penalties, a failure to file penalty of $10,000 per asset (which can increase to $50,000 if the failure continues after IRS notification), and a 40 percent penalty on an understatement of tax attributable to an undisclosed specified foreign financial asset.